Firms U and L are in the same risk class and that both have EBIT =...
Firms U and L are in the same risk class and that both have EBIT = $1,000,000. Firm U uses no debt financing and its cost of equity is KsU=15%. Firm L has $2 million of debt outstanding at a cost of Kd = 5%. There are no taxes and MM assumptions hold.
- Find V, S, Ks, and WACC for firms U and L.
- Using the data given above, but now assuming that firms L and U are both subject to a 40% corporate tax rate, repeat the analysis under the MM with-tax model.
- Now suppose investors are subject to the following tax rates: TD=20% and TS=10%. What is the gain from leverage according to the Miller’s Model?
- How does this gain compare to the gain in the MM model with corporate taxes?
Homework Answers
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Firms U and L are in the same risk class and that both have EBIT
=...
0 Firms U and L are in the same risk class and that both have EBIT...
0 Firms U and L are in the same risk class and that both have EBIT = $1,000,000. Firm U uses no debt financing and its cost of equity is KsU-15%. Firm L has $2 million of debt outstanding at a cost of Kd = 5%. There are no taxes and MM assumptions hold. 1 , Using the data given above, but now assuming that firms L and U are both subject to a 40% corporate tax rate, repeat the...
MM with Corporate Taxes Companies U and L are identical in every respect except that U...
MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $16 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 12%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For...
is unlevered while has 12-13 Comp and are identical in every respect except that $10 million...
is unlevered while has 12-13 Comp and are identical in every respect except that $10 million of hands outstanding. Assume that (1) all of the MM assumptions are met, 21 there are no corporate or personal taxes O ESIT is $2 million, and (4) the cost of equity to Company Lis 10 What w e would MM estimale for each firm? b What is t for Firm U7 For Firm Finds, and then show that 5 + D- V -...
please help me solve for this question eBook MM with Corporate Taxes Companies U and L...
please help me solve for this question
eBook MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 10%. a. What value would MM Now estimate for each firm?...
Company 1 and Company 2 are identical firms in all respects except for their capital structure....
Company 1 and Company 2 are identical firms in all respects except for their capital structure. Company 1 is all equity financed with $800,000 in stock. Company 2 uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $95,000 and all income will be distributed as dividends. Ignore taxes. a. Fred owns $30,000 worth of Company 2 stock. What rate of return is he...
The two firms U and L differ only in their capital structure. You have the following...
The two firms U and L differ only in their capital
structure. You have the following information (? denotes missing
data):
D (Value of perpetual riskfree debt) E(Value of Equity) E(EBIT(1-T)(operational cashflow, a? 0 800 1500 perpetuity) Expected return on equity Re(riskfree rate) 10% 4% a) Compute the operational cashflows of U and L, the value of equity of L, the cost of capital of L(HwACC) and the expected return on levered equity(HL) when the corporate tax rate (t) is...
WorI 2. Consider Table 1 Table l Corporate tax Personal tax ratePersonal tax rate Cost of Firm AssetsDebt Equity unleve...
WorI 2. Consider Table 1 Table l Corporate tax Personal tax ratePersonal tax rate Cost of Firm AssetsDebt Equity unlevered equity | on equity (%) rate (%) on debt (%) 15% 100 0 100 0% 0% 0% 15% 100 50 50 20% 0% 0% 100 100 50 50 15% 20% 20% 10% 50 15% 20% 10% 50 4 20% Earnings Before Interest and Taxation (EBIT) is 50 for all firms Cost of debt capital is 10% for all firms (a)...
Companies U and L are identical in every respect except that U is unlevered while L...
Companies U and L are identical in every respect except that U is unlevered while L has $7 million of 6% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $1 million, and (4) the cost of equity to Company U is 10%. What value would MM estimate for each firm? Enter your answers in millions. For example, an answer of $1.2 million should be...
2. Consider Table 1 Table 1 Levered Firm L Liabilities and Shareholders' Equit Assets 100 200 Equi Assets 100 Debt...
2. Consider Table 1 Table 1 Levered Firm L Liabilities and Shareholders' Equit Assets 100 200 Equi Assets 100 Debt Total 200 200 Total Additional Financial Information for Levered Firm L 80 Earnings Before Interest and Tax Cost of debt capital 8% 12% 255% Cost of unlevered equi Corporate tax rate 15% 30% Personal tax rate on debt income Personal tax rate on equity income Consider Table 1. Calculate the interest expense, earnings before taxes, the tax liability, and the...
0 Firms U and L are in the same risk class and that both have EBIT = $1,000,000. Firm U uses no debt financing and its cost of equity is KsU-15%. Firm L has $2 million of debt outstanding at a cost of Kd = 5%. There are no taxes and MM assumptions hold. 1 , Using the data given above, but now assuming that firms L and U are both subject to a 40% corporate tax rate, repeat the...
is unlevered while has 12-13 Comp and are identical in every respect except that $10 million of hands outstanding. Assume that (1) all of the MM assumptions are met, 21 there are no corporate or personal taxes O ESIT is $2 million, and (4) the cost of equity to Company Lis 10 What w e would MM estimale for each firm? b What is t for Firm U7 For Firm Finds, and then show that 5 + D- V -...
please help me solve for this question
eBook MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 10%. a. What value would MM Now estimate for each firm?...
The two firms U and L differ only in their capital
structure. You have the following information (? denotes missing
data):
D (Value of perpetual riskfree debt) E(Value of Equity) E(EBIT(1-T)(operational cashflow, a? 0 800 1500 perpetuity) Expected return on equity Re(riskfree rate) 10% 4% a) Compute the operational cashflows of U and L, the value of equity of L, the cost of capital of L(HwACC) and the expected return on levered equity(HL) when the corporate tax rate (t) is...
WorI 2. Consider Table 1 Table l Corporate tax Personal tax ratePersonal tax rate Cost of Firm AssetsDebt Equity unlevered equity | on equity (%) rate (%) on debt (%) 15% 100 0 100 0% 0% 0% 15% 100 50 50 20% 0% 0% 100 100 50 50 15% 20% 20% 10% 50 15% 20% 10% 50 4 20% Earnings Before Interest and Taxation (EBIT) is 50 for all firms Cost of debt capital is 10% for all firms (a)...
2. Consider Table 1 Table 1 Levered Firm L Liabilities and Shareholders' Equit Assets 100 200 Equi Assets 100 Debt Total 200 200 Total Additional Financial Information for Levered Firm L 80 Earnings Before Interest and Tax Cost of debt capital 8% 12% 255% Cost of unlevered equi Corporate tax rate 15% 30% Personal tax rate on debt income Personal tax rate on equity income Consider Table 1. Calculate the interest expense, earnings before taxes, the tax liability, and the...
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